That's why many people prefer permanent whole life or universal life insurance, which can provide life-long protection while building cash value.1 A portion of your premium dollars is invested by the insurance company and grows tax-deferred, providing financial benefits you can use during your lifetime. The good news is, a convertible term life insurance policy can give you the best of both worlds: the affordable protection of a term policy now, plus the option to convert to a permanent life insurance policy later on. This article will tell you more about:

How a convertible life insurance policy works

Most term life policies are "level term life insurance," which means the premium (and death benefit) stay the same for the length of the term, which could be 5, 10, 15, 20, or 30 years. A convertible level term policy works precisely the same way – but it has a provision or "rider" that gives you the option to convert to a permanent life policy later on. If you don't exercise the conversion option, the policy will continue to protect you until the end of the term with no change. In fact, many people that have a conversion clause in their policies probably don't even know it.

Why would you convert an existing term policy rather than getting a new whole life or universal policy? When you apply for a new insurance policy, there's an underwriting process in which the insurance company evaluates your age, lifestyle, and health status – via questions and a medical exam – to determine your premium cost. But when you convert a policy, you get to keep the health rating you had when the policy started. There are no health questions and no medical exam to uncover health issues that might raise your premium cost. 

Many term policies have a standard provision that allows for conversion for the first few years, and some offer a rider that lets you extend that. For example, Guardian Level Term policies come with a benefit allowing you to convert to a permanent policy for the first five years of the term. An Extended Conversion Rider (ECR) is also available for an additional charge, which lets you convert to a permanent policy for the term's entire length.2

Converting to a permanent policy

Each life insurance company sets its own procedures for policy conversion, but generally speaking, the process tends to be straightforward. You should start by contacting your insurance company or agent to see what permanent conversion options are available. Some companies may allow you to convert to a whole life or universal life policy; others may only allow conversion to a whole life policy. Still, others will let you convert a portion of your term coverage amount to permanent life insurance coverage. That can be useful since permanent life insurance, such as a whole life policy, typically costs more than term life. It also provides benefits term life can't offer, including: 

  • Life-long insurance protection
  • A tax-advantaged cash value component with guaranteed growth
  • The certainty that you or your beneficiaries will see a financial benefit

Whole life insurance provides many benefits you can use while you're still alive: You can borrow against your policy's cash value, use it to pay premiums, or even surrender it for cash to supplement your retirement income.3 With a mutual company, such as Guardian, whole life policies can also earn annual dividends (a portion of the insurer's profits), which can further increase your cash value and provide other benefits.4 Here's a summary of some of the other differences between a whole life and term life policy:

 

Policy Feature

Term Life Insurance

Whole Life Insurance

Premiums

Lower

Higher

Cost over time

Renewal cost increases with age

Cost stays the same for life

Cash value component

No

Yes

Permanent coverage

No

Yes

Choice of coverage lengths

Yes

No

Level premiums

Usually

Yes

Heath exam required

In most cases

Yes, but not when you convert from a term policy with a conversion option

Ability to withdraw cash value

No cash value

Yes

Guaranteed death benefit

Yes

Yes

Eligible for dividends

No

Yes (if the insurer is a mutual company)

Policy structure and provisions

Relatively simple

More complex

 

Reasons to consider getting a convertible term life policy

While it may be cliché, the fact is most people buy life insurance to have financial confidence – and a convertible life insurance policy simply can provide more financial confidence. A term conversion option gives you more ways to protect yourself from life risks and uncertainties. If you have any of the following concerns, you should consider making sure your term life policy is convertible before you sign the dotted line.

You're concerned that you could develop health problems 

A term policy can last for decades, and many health changes can happen in that time. For example, after a routine health exam, you could be diagnosed with a chronic condition such as diabetes. Even if well managed, it could significantly raise the cost of a new policy later on. Worse yet, your health could take a severe turn for the worse; in that case, conversion could be the only viable way to stay insured and provide the protection you want for your loved ones.

You're not sure how long you need protection

One of the first decisions you have to make when buying a term life policy is how long you want your term to last. Many people want life insurance to protect their family while the children are still growing up, so they buy a policy that lasts until the youngest child reaches adulthood or finishes college. That's a good plan, but things could change. For example, you could have another child or have other family dependents to support. A convertible policy can give you the flexibility you need to adapt to changing situations.

You're concerned about the cost to renew term life

As you get older, life insurance becomes more expensive. Suppose you're just looking to get a 10-year term policy now but concerned about the higher cost to renew coverage when you're ten years older. In that case, convertibility gives you an added extension option if you need it later on. 

You don't like the idea of paying premiums with no payout

The truth is, most term insurance policies expire without paying a death benefit, because most people outlive the length of their policy.  That’s a good thing!  But it also means you may not see a return on your premiums paid.  . After a few years of making regular premium payments, you may decide you'd rather build value with a permanent life insurance policy. Conversion may be the easiest and most affordable way to make that happen.

The pros and cons of getting a convertible policy

Before we talk about the pros and cons, it helps to understand how little a convertible policy can cost. This calculator can give you an immediate quote:

Term life insurance calculator 

See how much you need and get an instant quote.

Even with an Extended Conversion Rider, convertible term life insurance may only be fractionally more expensive than a non-convertible policy. So everything else being equal, the question isn't why to get a convertible policy, but why not get a convertible policy when the cost is so similar? Because there are a few situations where convertibility really doesn't matter:

You already have permanent life insurance 

Permanent and term life insurance policies aren't an either/or proposition. Some people purchase permanent life insurance policies because they're attracted to the life-long advantages they provide. However, they also want added term coverage for a limited time – for example, while their children are still living at home. For these people, convertibility may not be needed because they already have permanent protection.

You know you only need coverage for a fixed amount of time

Some people buy life insurance to protect themselves from a specific, limited-time financial obligation, such as a mortgage. In these cases, a convertibility clause may not be needed because it's unlikely to be exercised.

You have more specialized financial needs

If you have significant financial assets and are looking to purchase term life insurance to add temporary protection for a young family, then convertibility may not be relevant. Not because high-net-worth individuals don't need permanent life insurance – it can be a useful tool for transferring assets to heirs – but because these people may need more specialized policies than those typically available through policy conversion. If you have questions about this issue, speak with your financial or tax professional.

How to buy a convertible term life policy

While many people get life insurance through their workplace, you may not have a choice of insurance companies, and the policy offered may not be convertible or even portable (meaning you can't continue coverage if you leave your employer). Fortunately, there are other ways to make sure you get a convertible term policy.

Online

It's easy to shop for convertible policies online. Many insurance companies make it simple to get a life insurance quote online, compare rates for different coverage levels, and apply for a policy. When you get a term life quote from Guardian, it will be for the kind of convertible policy discussed. It comes with a benefit letting you convert to a whole life policy for the first five years of the term, and for a modest charge, you can add an Extended Conversion Rider (ECR) which lets you convert to a whole life policy for the entire length of the term. 

Working with a financial professional

If you have questions about how much coverage you should have, how long the term should last, or whether term or permanent insurance is best for your needs, consider working with a financial professional. They can provide experienced insurance information about the options that fit your immediate needs and long-term goals. If you have a financial professional you trust, ask them how much life insurance and what type of policy you should have. Otherwise, Guardian can connect with a financial representative who will listen to your needs, tell you about the best ways to meet those needs within your budget, then help you decide. 

Frequently asked questions about convertible term life policies

How does convertible term life insurance differ from renewable term life insurance?

Convertibility and renewability refer to two very different features of a policy. Life insurance companies may offer term life insurance policies with both features, one of them, or neither:

  • Convertibility gives the policyholder an option to convert to permanent coverage (for at least part of the term) without providing evidence of insurability or getting a medical exam that could change their health rating.
  • Renewability (or guaranteed renewability) gives policyholders the option to renew coverage at the end of the term, but the premium can change (and will almost always be more costly). Suppose you exercise the renewability clause at the end of a 10 or 20-year term policy. In that case, you can expect significantly higher premiums – but if your health has taken a severe turn for the worse, it may be your only coverage option.

What are the benefits of a convertible and renewable term life insurance policy?

A policy that combines both of the benefits described above gives you more options to deal with life's risks and uncertainties. Specifically, this kind of policy lets you convert to permanent coverage if you come to believe that's a better choice. If you don't convert, you'll still be able to extend coverage if needed after the term expires, albeit typically at a steep cost.

Should I convert my term life insurance to permanent?

There's no single answer that's right for all people. However, if you're attracted to the life-long protection and cash value growth of a permanent policy, and your current term policy lets you convert to permanent coverage that fits your needs, then it's certainly an option worth looking into.

What happens if I outlive my term life insurance?

Once your term life policy ends, you can no longer convert to permanent coverage, and you can't "cash it in" because there's no accrued cash account value. Generally speaking, you either have to buy another policy at a higher cost or go without life insurance. However, if your policy has a guaranteed renewal clause, you can renew at the end of your term on a year-by-year basis but at a higher rate. While expensive, it can be worthwhile if your health has changed.

Disclaimer

Guardian  Protecting Those We Love Publication 2019-85384 (9/21)

Guardian  Term Conversions — The Guardian Advantage  Pub8698 (01/20) 2019-91746 (Exp. 01/22)

1 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.

2 Riders may incur an additional cost or premium. Riders may not be available in all states.

3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.

4 Dividends are not guaranteed. They are declared annually by Guardian’s Board of Directors.

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